South Korea's Pension Fund Adjusts Dollar Holdings Amid Market Changes

South Korea's Pension Fund Strategy in Forex Market

Recently, South Korea's pension fund has begun selling dollars in the domestic foreign exchange market, a move aimed at limiting losses in the won currency as the dollar's value rises. This strategy reflects a proactive approach taken by the National Pension Service (NPS), one of the largest public pension funds globally.

National Pension Service Overview

With assets exceeding $810 billion, the NPS plays a crucial role in the country's financial landscape. This fund is regarded as a significant influencer of market movements due to its size and investment strategies.

Current Market Moves and Speculations

According to insiders, the NPS has engaged in dollar selling within the spot market, primarily for tactical foreign exchange hedging and portfolio rebalancing. Reports suggest that as the ratio of foreign assets climbed above the targeted threshold, it necessitated the pension fund to intervene and adjust its holdings.

Adjusting to Market Dynamics

The NPS has historically created downward pressure on the won as it increased international investments, with estimates indicating outflows ranging from $2 to $3 billion monthly. Now, at a critical threshold, the fund's dollar selling aims to stabilize the currency.

Impact on the Won and Local Markets

Currently, the won is trading near the significant level of 1,400 per dollar, marking a complex landscape as the currency has depreciated by about 8% in 2024. This ongoing decline has stretched over four years, highlighting the persistent challenges faced by the won.

Local Stock Market Performance

Amidst these currency fluctuations, the KOSPI index has recently experienced its low point in a year, juxtaposed against a robust phase for U.S. stocks, posing challenges for local investors. While the KOSPI has dropped by 5% year-to-date, the S&P500 has shown a remarkable gain of 26%.

Asset Allocation Insights

Insights reveal that by the end of August, the NPS allocated 13.2% of its assets to domestic equities while 34.2% were invested in foreign equities. This allocation diverges from its year-end targets, reflecting the ongoing strategic adjustments in response to market movements.

Active Investments in KOSPI

In November alone, the pension fund, along with other smaller investors, acquired KOSPI shares worth approximately 1.9 trillion won, the largest purchase volume since March 2020. These investments demonstrate a commitment to capitalize on market conditions.

Hedging Strategies and Future Plans

The NPS adopts a prudent approach towards its foreign assets, hedging up to 5% when necessary to mitigate foreign exchange risks. With a total asset value of around 1,140.1 trillion won, of which 55% is held abroad, the fund is inclined to increase this ratio to 60% by 2026, aspiring for enhanced returns amidst demographic shifts.

Collaborating with Central Bank

In a bid to further stabilize market conditions, the NPS is currently in discussions with the central bank regarding the potential extension and expansion of their $50 billion foreign exchange swap line. This line serves as a key stabilizing mechanism and is expected to conclude by the year-end.

Frequently Asked Questions

What prompted the NPS to sell dollars?

The NPS's recent dollar sales are primarily aimed at managing foreign asset ratios and stabilizing the won amid rising dollar values.

How significant is the NPS in financial markets?

As one of the world's largest pension funds with over $810 billion in assets, the NPS plays a vital role in influencing domestic financial markets.

What impact has the NPS had on the won?

The NPS has historically put downward pressure on the won, particularly as it has increased its overseas investments.

What are the NPS’s investment allocations?

Currently, the NPS holds 13.2% of its assets in domestic stocks and 34.2% in foreign stocks, which deviates from its targeted allocations.

What is the future plan regarding foreign investments?

The NPS plans to increase its foreign asset holdings ratio to 60% by 2026 to achieve better returns while managing risks associated with an aging population.

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